It's not just a matter of judicial vs. non-judicial anymore.
large differences in foreclosure inventories between judicial and non-judicial states. But, while that distinction continues to be important, it is no longer enough--implementation of an array of legislative and judicial changes at the individual state level has exacerbated or reversed trends driven by those broader designations.
The judicial vs. non-judicial question remains important for good reason--states that follow a judicial process have foreclosure inventories that are more than three times the level of non-judicial states (measured as a percentage of the total active loan population).
This is not because the crisis hit harder in judicial states; both judicial and non-judicial delinquency rates peaked at the same time--January 2010--and at similar levels-10.5 percent and 10.6 percent, respectively.
However, matters have progressed very differently since that time. When ranked by combined delinquencies and foreclosures, six of the top 10 states at the start of 2010 were non-judicial. As of April 2013 month-end, only three non-judicial states remain on that list, and the number is reduced to one (Nevada) when looking at foreclosure inventory alone.
The pace of recovery has clearly diverged and is greatest when focus shifts from delinquent loans to those in foreclosure.
However, as new legislation and court rulings are implemented in various states, overriding the impact of the basic judicial vs. non-judicial distinction, we are finding that this broad-brush designation is no longer enough to manage risk, losses and evaluate the prospects for ongoing recovery.
The root cause of the divergent recovery has rightly focused on the end of the foreclosure process, where constriction has inflated foreclosure inventories in judicial states relative to their non-judicial peers. Over the past three years, the monthly percentage of inventory that goes to foreclosure sale in non-judicial states has averaged 3.5 times that of judicial states.
Individual state process changes have had similar, though in most cases more profound, restrictive effects.
As Figure 1 makes clear, individual state process changes have had similar, though in most cases more profound, restrictive effects. In particular, New York and New Jersey--both judicial states--have seen foreclosure process requirements and penalties put in place that have reduced foreclosure sales to de minimis levels, exacerbating the impact of the standard judicial process.
FIGURE 1 FORECLOSURE SALE CHANGE: Q1 2013 VS. PRE-LEGISLATIVE/ JUDICIAL CHANGES vs. Q4 2012 Down 35% since Q4 2012 California vs. Q2 2012 Down 81% since Q2 2012 Massachusetts vs. Q3 2010 Down 68% since Q3 2010 New Jersey vs. Q4 2011 Down 60% since Q4 2011 Nevada vs. Q3 2010 Down 73% since Q3 2010 New York SOURCE: LPS Applied Analytics Note: Table made from bar graph.
More recently, California, Nevada and Massachusetts--all non-judicial states--have implemented legislation or experienced court rulings that have lowered the rate of foreclosure sales in those states making them behave more like judicial states.
The New York and New Jersey requirements have been in place since 2010 with foreclosure sales today remaining 72 percent below where they were in January of that year. The resulting impact on foreclosure inventory is readily apparent. While national levels have declined almost 17 percent since January of that year, New York and New Jersey percentages have increased by 57 percent and 42 percent, respectively. Even compared with other judicial states, which declined 7.8 percent over the same period, this growth is extreme.
The changes in Nevada, Massachusetts and California have been more recent and the impact on inventory less apparent to date. However, foreclosure sale activity indicates that there is reason to believe that those changes are coming.
At the start of 2012, Nevada implemented legislation requiring an affidavit from the lender prior to foreclosure that has pushed foreclosure sales down 60 percent.
Even more dramatically, Massachusetts' Supreme Court ruling at the end of 2012 requiring lenders to prove ownership at time of foreclosure sale has pushed those rates down more than 80 percent (very similar to New York and New Jersey in 2010).
Lastly, California implemented a Homeowner's Bill of Rights in January of this year that has resulted in a 35 percent decline in foreclosure sales over just one quarter. As a basis for comparison, the rest of the nation experienced an increase in foreclosure sales of 13 percent over the same period.
As with New York and New Jersey, these changes are likely to slow, if not actually reverse positive trends in foreclosure inventories in those states.
Highlighting the importance of granular information, these new process changes alter the dynamic of the basic judicial vs. non-judicial distinction. In addition to creating additional operational challenges for lenders, the variation makes assessing the recovery, estimating loan-level losses and evaluating future risk more difficult.
As we've written in the past, we track several key metrics to assess whether any collateral impacts are resulting from the various process differences, including new problem-loan rates, modification activity, origination volumes and interest rates on those newly originated loans. To date, we continue to see no significant differences in these metrics. However, watching for these impacts and tracking new changes as they occur at the individual state level will be critical to portfolio risk management in the post-crisis environment and perhaps answer the question of which process is "better."
Herb Blecher is senior vice president, analytics, for Jacksonville, Florida-based LPS Applied Analytics. He can be reached at firstname.lastname@example.org.
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|Date:||Jul 1, 2013|
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